For a country that so often leads the world in technological innovation, it is ironic that change in other areas can be painfully slow in Japan.
Perhaps nowhere is this more true than in the aviation industry, where deregulation has moved at a snail's pace since it began in 1986 amid promises of more choice for consumers, better service standards and lower fares.
It all began with a decision to allow All Nippon Airways (ANA) and Toa Domestic Airlines (TDA) - which in 1988 changed its name to Japan Air System (JAS) - to compete on international services with Japan Airlines (JAL), which at the time was government-owned. Simultaneously, JAL and TDA were given approval to compete with ANA on domestic services beyond just the handful of trunk routes and local feeder routes they operated on.
The deregulation process continued in the mid-1990s, when restrictions were eased on fare discounting and prices began to fall. The Japanese Government is preparing to put in place the final pieces of its deregulation puzzle, with the removal of all supply and price controls by 31 March this year.
The changes have led to the launch of the first independently owned airlines in Japan in more than 30 years.
Skymark Airlines was the first, starting Tokyo-Fukuoka services in September 1998. It operates two leased Boeing 767s on two other routes linking Osaka with Sapporo and Fukuoka. The carrier is backed by discount air ticket broker HIS.
Hokkaido International Airlines was the second start up in Japan and operates as Air Do (meaning Hokkaido people) with a leased 767 on the busy Tokyo-Sapporo route. It is backed by Hokkaido-based business concerns.
Haneda slots
The new carriers were only able to launch services after a second runway opened at Tokyo's congested Haneda domestic airport in 1997 and each was given three daily landing and take-off positions. Their strategy so far has been to challenge the majors on price but their impact has been relatively minimal and both are suffering - for one month last year Skymark had a load factor on one of its routes below 10%.
In theory, airlines are free to start operating throughout Japan after getting a permit, rather than a licence, from the government. In practice, however, it is not that simple and some fear efforts to open the industry to more competition may prove futile if airport capacity problems are not quickly resolved.
Prof. Hirotake Yamauchi, a senior member of the Ministry of Transport's influential strategic policy committee, says that although deregulation became official policy 15 years ago, in reality it only began in the 1990s with the introduction of discount fares and the opening of the new runway at Haneda. Yamauchi believes a lack of slots will continue to obstruct competition in the years ahead.
"The new Japanese carriers are not really free to compete in the marketplace," he says. "The major obstacle would be the limitation to the slots available at the major hub airport in Japan, Haneda, and that limits competition."
As a result, Japanese transport authorities are being forced to consider drastic action that may have a serious impact on the majors in future.
One controversial plan under study will see take-off and landing slots stripped from the "big three" at congested domestic airports and handed to new operators. Yamauchi says the "revoke and reallocate system" will take years to implement but "will probably be the most drastic in the world".
"This reallocation will be a very difficult exercise because it will impinge on the vested interests of the incumbents," says Yamauchi, who is also an economics professor at Hitotsubashi University. "This is something that needs to be done. I think the most likely [timeframe] at this moment is five years from now."
Before the plan is implemented, however, the transport ministry will introduce a less dramatic but still controversial change in the way it allocates slots at Haneda, where a third runway will be opened this year.
The change will see a "rating system" brought in under which airlines will win new slots depending on the number of points they receive for quality of service and other areas. Details of the system are due to be finalised by the end of this month, says Yamauchi.
"The objective of this exercise is to add to competition by giving preference to new entrants and competitive carriers," he adds.
Haneda's third runway will initially see 31 daily rotations, or 62 take-off and landing slots, being made available. An additional 52 slots (allowing 26 services) will be available in 2002. It is also considered likely that Haneda will be approved to handle international flights (it caters for Taiwan's China Airlines, but only for political reasons) to reduce the burden on Narita international airport.
Yamauchi admits, however, that the measures his committee is proposing will do little to expand the market, given the airport capacity constraints. As a result he - like many others - is pushing the government to decide soon on a third airport for Tokyo. This has been under discussion for years but is so sensitive that no real progress has been made.
Yamauchi also believes that the continuing lack of truly new competition in the domestic market is not solely due to inherent infrastructure problems. He says that new entrants share much of the blame themselves. They have not been innovative enough.
He is critical of the low-fare option they have chosen and which last year led to a damaging price war. "I have to doubt the skilfulness of their marketing strategy," he says. "I don't think that is attractive enough to compete head-on with the incumbents. Initially, when they come out with low fares they would undoubtedly have high demand, but the incumbents would match, which they did."
Internal restructuring
The new carriers have had some impact on the majors, however, with much-needed internal restructuring efforts being carried out. JAS has also dropped some international services and is codesharing on JAL-operated flights. There is speculation that JAS will be taken over by JAL, as the industry will be forced to consolidate in the years ahead.
Despite the clear difficulties, more carriers are planned, while Skymark and Air Do say they will be expanding.
One of the next new carriers to be launched will be Fair Inc, which has acquired 50-seat Canadair Regional Jets (CRJs) and plans to start services in July. President Jun Okawara says his airline is proposing initial services between its Sendai base and Hiroshima's Nishi Airport, and between Nishi and Haneda. Other routes are being considered.
Okawara was Skymark's founding vice-chairman until he left to establish Fair Inc in April last year. He believes fundamental changes are taking place in the Japanese industry, despite what critics say, and a likely result will be the emergence of more regional jet operations such as the one he is planning.
Although several Japanese carriers operate turboprop-powered aircraft, none currently operates regional jets. A JAL subsidiary is, however, planning to enter the fray with an order for CRJs.
"Before I started Skymark my business plan was just like the Fair Inc project," Okawara says of his reasons for planning the carrier. "I was interested in operating local routes with small jetliners."
Regional uncertainty
Yamauchi is not so sure, however, that regional jet aircraft will take off in Japan the same way as they have in the USA. That is primarily because the Japanese market is so different, with far more problems. "There is a predominance of widebodied aircraft in Japan essentially because of the congestion problem at Haneda Airport," he says.
"I think that trend will stay to the extent that the Haneda capacity problem remains. I don't think that we'll see the sort of frequency competition that you see in the USA using smaller equipment. Having said that, in those small markets, large aircraft would not pay off."
One planned carrier taking the middle ground in terms of aircraft size is Skynet Asia, which intends to launch services in the middle of next year using Boeing 737-400s. President Hiro Hattori says initial routes will cover Fukuoka-Miyazaki and Fukuoka-Naha. Operating approval will be sought in July.
Skynet has already faced difficulties. Until last August the planned carrier had been known as Pan Asia Airlines and initially intended to start services last year, later delaying the launch to next April because of troubles in raising financing. Hattori, a former executive with flightcrew leasing and training company IASCO, will not provide reasons for the further launch delay to 2001, saying only that they go beyond the state of the market, which remains depressed.
Whichever model is successful for new airlines, the industry is still struggling to come to terms with change 15 years after deregulation officially began. Given the issues yet to be resolved, many believe that consumers may not feel the promised benefits of deregulation for some time.
Source: Airline Business
